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Outlook: LNG to Get Push-Back from Shale Production

Want to know what the coming years will bring for importation of liquefied natural gas (LNG) to the United States? Then look back at 2008. The gas industry can expect more of the same, according to a model run by two Rice University economists. However, others suggest growth in global LNG production in 2009 will lead to increased U.S. imports.

Last year is representative of what the next decade will look like, economist Kenneth Medlock told NGI. Medlock, who is a fellow in energy studies at the James A. Baker III Institute for Public Policy at Rice in Houston, and Peter Hartley, an economics professor and Baker Institute scholar, have been inputting new data on the production outlook for gas shale plays in the United States into their world gas model.

The model "is telling us that LNG trade in general will grow, but the nature of that trade in terms of its regional destination is different now than, say, it was a year ago when we were running the model, largely because of what we've done with updating the shale assessments," Medlock said. Like others have said, the United States will be a market of last resort for global LNG; an LNG sink, if you will.

According to data compiled by Tudor, Pickering, Holt & Co. Securities Inc., gas sendout from U.S. LNG receipt terminals was about 0.9 Bcf/d in each of the second and third quarters of 2008 versus about 2.9 Bcf/d in each of the year-ago periods. In the first quarter of 2008 sendout was about 0.8 Bcf/d compared to about 1.9 Bcf/d in the first quarter of 2007.

While the Rice economists predict the U.S. will remain a market of last resort, analysts at Waterborne Energy are predicting there will be a 30% rise in total LNG production worldwide by the end of 2009 and some of that will make its way to the United States. If all projects remain on schedule, about 2.8 Tcf of new LNG production capacity will be on-line by the first half of 2009.

"We don't believe Asia and Europe will be able to absorb this new production, despite 11 new regas terminals under construction. And the economic downturn will limit power demand in Europe, Asia and the U.S.," said Waterborne President Steve Johnson.

Waterborne predicts monthly imports of LNG to the United States will average about 40 Bcf by July and could reach 64 Bcf by the end of 2009. For 2010, Waterborne said imports could exceed the 2007 record average of 2.1 Bcf/d.

Analysts at FBR Capital Markets are of a similar mind. "We anticipate excess global supply from new plants and lower demand across the board to allow LNG to flow to the U.S. at 2 Bcf/d in the second and third quarters of 2009, 1.2 Bcf/d in the winter of 2009-2010, and based on our assumptions, 3.6 Bcf/d in the summer of 2010," the analysts wrote in a research note earlier in December. FBR predicts a 33% increase in global LNG supply.

Whatever cargoes do come to the U.S. will have to overcome pushback from burgeoning shale gas supplies.

"In general, what the model has shown us is that the room for growth from shale is actually quite large," Medlock said. He noted that whether the United States develops an aggressive policy to tackle carbon dioxide (CO2) emissions will have large implications for the gas market.

"We feel like the fuel that will benefit the most from that, especially in the short to medium term, is natural gas," he said. "We know how to build natural gas [generating] plants; we already have a lot of natural gas plants constructed that aren't running at full capacity. Gas [generation] is something we can build very quickly...We're going to need to do that to even pretend that we're going to be in compliance with required reserve margins."

A tight CO2 policy would lift production from the shale plays and also from tight formations in the Rockies, but it also would lift LNG imports, Medlock said. However, if restrictions on exploration and drilling in the Rockies and on the Outer Continental Shelf are relaxed, "you end up back in a situation, despite rapid growth in demand with CO2 restrictions, where those LNG terminals remain relatively unutilized for about a decade because you're talking about really increasing domestic supply capacity."

The economists' model predicts a Henry Hub gas price mean of $6.70-7.80/MMBtu from 2010 to about 2040.

A paper on Medlock and Hartley's research is expected to be published in mid-January and will be available at www.bakerinstitute.org.

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